Old Rule, New Theory: Revising the Personal Benefit Requirement for Tipper/Tippee Liability Under the Misappropriation Theory of Insider Trading

Abstract

Under the classical theory of insider trading, tipper/tippee liability may arise only when the tipper makes the relevant disclosure to obtain a personal benefit. Courts are divided, however, as to whether this personal benefit requirement applies to the misappropriation theory of insider trading. This Note argues that because the personal benefit requirement is severely flawed, courts should not impose it in misappropriation cases. Instead, courts adjudicating isappropriation cases should require that (1) the tipper was at least reckless as to whether he or she would either benefit personally or harm the information source by tipping, and (2) the tipper was at least reckless as to whether someone in the line of tippees would use the information to trade. This standard should be subject only to the tipper's defense that the disclosure was made in a good faith attempt to prevent criminal activity reasonably certain to cause substantial physical or financial harm to others.